The prime motivation for this practice is the reluctance of companies to share their fine-grained gross margins. Panelists and compilers of industry data frequently use net sales as the numerator in the inventory turnover equation. When considering the stock levels associated with parts, components or raw materials, the notion of inventory selling price is somewhat fuzzy as only the prices of the finished goods are ever observed directly. In a more abstract way, it can be said that the inventory turnover tries to capture the ratio flow over state.Īs a rule of thumb, the purchasing flavor of inventory turnover tends to be more prevalent among most verticals. Most of these variants are acceptable as long as the ratio is homogeneous, with aligned units for both values. The numerator always represents the flow of inventory, while the denominator always represents the state of inventory. Indeed, as soon as the goods are ordered, the company carries the risk associated with those quantities, and thus those quantities negatively impact the company’s supply chain agility. This includes the stock on hand but also the stock on order.
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